PUrchasing the shop I'm currently working at. Advice?

Hi Guy's, This is my first post so be gentle with me

I've perused this site for years but have never officially signed up and become a member. I've learned quite a bit from these forums and would like to begin with a genuine thank you to all of you who contribute. I currently have plans to purchase the business that I've been at work for the last 11 years and am in need of a bit of business advice from those that have "been there done that". Here is a little backround about me...

-I'm 29yrs old and have been in machining since I was 18
-In the last 11 years I've moved from my humble beginnings of painting walls to
-Deburring
-Operator
-Set-up
-Programmer
-Inspector
-Quoting
-Purchasing
And currently run the day to day operations as Operations Manager. I've worked many hours beyond required (unpaid or paid) to get a job done and believe that it is my duty to do so. I've been fortunate enough to work with an amazing employer who has granted me every opportunity to grow within his business and like to express my gratitude through my work.

This has lead to the opportunity I'm presented with today... Owning the business. I have been extremely involved with the running of production but am not inept to point out there is complete other side of the business that I have no experience with such a sales/financial anything or any type of marketing. We are ran very old school and it has worked well in the past with our owner but times change and more specifically our customers "requirements" change.

I feel like We've got a decent core group working for us but is not near what we need to function properly on a day to day basis. Skilled labor is hard to find and some of these wages they are requesting seem a bit extreme? I had a guy in last month that wanted $48 an hour to program and occasionally setup a machine which blew my mind that he'd ask that from a small shop like ours.

We've had a core group of customers as well that have been with us for 20+ years. Requirements from them are changing (mostly quality related) that have really put a strain on QA department and have had to invest recently in a programmable CMM as well as a QA/QC department. I know this is probably just needed but for years we operated perfectly fine with the inspection procedures we had before but now seem to be becoming nit picky about small things.

What should I be prepared for? I feel I have an abundance of common sense but how far will that get me? I could write a million more questions but this post seems to already be dragging out lol.

P.S. Time Frame is currently set at 2 years.

Jetrocket said:

Hi Guy's, This is my first post so be gentle with me

I've perused this site for years but have never officially signed up and become a member. I've learned quite a bit from these forums and would like to begin with a genuine thank you to all of you who contribute. I currently have plans to purchase the business that I've been at work for the last 11 years and am in need of a bit of business advice from those that have "been there done that". Here is a little backround about me...

-I'm 29yrs old and have been in machining since I was 18
-In the last 11 years I've moved from my humble beginnings of painting walls to
-Deburring
-Operator
-Set-up
-Programmer
-Inspector
-Quoting
-Purchasing
And currently run the day to day operations as Operations Manager. I've worked many hours beyond required (unpaid or paid) to get a job done and believe that it is my duty to do so. I've been fortunate enough to work with an amazing employer who has granted me every opportunity to grow within his business and like to express my gratitude through my work.

This has lead to the opportunity I'm presented with today... Owning the business. I have been extremely involved with the running of production but am not inept to point out there is complete other side of the business that I have no experience with such a sales/financial anything or any type of marketing. We are ran very old school and it has worked well in the past with our owner but times change and more specifically our customers "requirements" change.

I feel like We've got a decent core group working for us but is not near what we need to function properly on a day to day basis. Skilled labor is hard to find and some of these wages they are requesting seem a bit extreme? I had a guy in last month that wanted $48 an hour to program and occasionally setup a machine which blew my mind that he'd ask that from a small shop like ours.

We've had a core group of customers as well that have been with us for 20+ years. Requirements from them are changing (mostly quality related) that have really put a strain on QA department and have had to invest recently in a programmable CMM as well as a QA/QC department. I know this is probably just needed but for years we operated perfectly fine with the inspection procedures we had before but now seem to be becoming nit picky about small things.

What should I be prepared for? I feel I have an abundance of common sense but how far will that get me? I could write a million more questions but this post seems to already be dragging out lol.

P.S. Time Frame is currently set at 2 years.

Click to expand...

Get a hot dog cart, way better return for the investment!

P.S. Time Frame is currently set at 2 years.

Click to expand...

Time frame for WHAT? exactly?

2 years until they let you know how much they will sell it for?? Or do you
already have a price negotiated. I bet you don't..



This is not uncommon in the machine shop world. Promise the SKY to your people to
get them to work harder.. And then when it comes "TIME" to sell.. The price is
somewhere around $4 a pound for scrap.

Why the 2 year wait??? I'll tell you why.. They want you to BUST YOUR ASS for
2 years, and then it will be a little longer, and a little longer and a little
longer etc... And they are hoping you are dumb enough to go above and beyond
with no extra compensation. Its a CRUEL game..

I'd go find a new job. 99% chance that shop will never be yours.. I'd bet
my Left Nut (that's my favorite one) that you aren't the first one this has
been promised to.


I'm not trying to be a downer, but this has played out time and time again
in the small machine shop world. Best to get the reality check now than
after you have wasted 2 more years of your life BUSTING YOUR ASS for NOTHING!!!!

Edit: sorry for the downer.. I really do hope this is the real deal and you
come out on top, that would be awesome, and then maybe you would post more??

If you're interested in buying, and they're ACTUALLY interested in selling, then hammer out a price now, and do it.

None of the common "Oh, bust your back for us for a few more years, then we'll start talking, but maybe we don't want to sell completely blah blah blah" bullshit.

And spend the money for a forensic accountant to go over the books. There's too many ways to get stung for you to do it yourself.

I'd suggest getting more involved in the accounting department. Do some data entry, learn your way around the program, and learn about generating reports and then study those reports. Get a gut feel for how the money ebbs and flows every month, and how you must prepare for the tax men, all year long. Basically, you can run a business by balancing a checkbook, but a certain portion of expenses must be anticipated.

You might need to consider if you're the type of person who can look at a $100,000 bank balance (or larger!) and not feel entitled to just helping yourself to some of it on a whim. A well run business needs a good cushion to weather a rough spot.

Presumably, you are buying into a money-making machine. It has to make the payments on itself. You have to imagine how that is going to happen, in considerable detail. You'll need to estimate the risk of going short.

How is the "opportunity" presented to you?
Any real method of transfer mentioned?
Despite the title they have given you you seem more of a production manger than a operations manager.
Things look easier from the production side but sales and marketing along with cash flow, taxes, and accounting things end up being the big kickers.
No doubt you can learn these but is there a plan to train you on this side in this time frame?
I wish you the best of luck, the transition will not be an easy one for you.

Given where you are positioned one big thing to be concerned with is sales. Without that you die and maybe have put your house and life savings on the hook.
From a production based standpoint this is easily overlooked as there is always more work to be done.
Sometimes the original owner leaving means these sales also dwindle.

I could post a million questions as well. Your point about the cmm raises my eyebrows.
You need to know the "plan" for transfer and do not go too far out on the limb where you can't walk away with just some bruises if it breaks.
Nothing ventured, nothing gained. Could be your golden ticket or your life's regret.

I seem to recall some posts from Bobw on getting burned a bit on such a deal so he has one very valid side to think about.
Then there is the optimistic side where the grass is green.
The owner wants out and will often come to their top employee as a first easy choice. In the end they will often go to the highest cash payout.
I'm more in the "go for it" crowd but "you have much to learn young grasshopper".
Bob

I'm with the posts above. Get a price now. The current owner will price it much higher than it's worth. I'm assuming it's a job shop? No product line? No long term contracts? The place is only worth the iron and real estate...........Buying contract for deed? Get it all squared with a lawyer. Don't go by a handshake or verbal agreement.........................

Lots of good feedback above. The reason it is nearly all cautionary is that we've seen this go poorly so many times - so even if it feels like the caution is throwing cold water on your dreams, listen very, very closely to the experience that you are tapping into on this forum. No one is saying this can't work; we're saying it requires a LOT of careful diligence, INCLUDING the willingness to walk away from the deal, for it to succeed.

One note to add to the comments above: Keep in mind that if you go this route, you will be changing jobs. Completely. Particularly with the business that you describe, you will no longer be a machinist; you will be a shop owner ... who occasionally has time to machine something. The machining knowledge that you have will be invaluable, but you must be prepared to learn a whole new skill set - sales, quoting, leadership/management of employees, regulations, taxes, etc., etc., etc.

California is a big place, took me too long to escape from there. Where are you at? Owning a machine shop in San Francisco is going to be a lot different than one in 29 Palms. Wages across the state vary immensely.

You are in California. There is a requirement that the seller of a busness comply with the Bulk Sales section of the Business & Professions code. (Commercial Code 2009, sections 6101-6111. ) This requires in part that the seller give notice of the sale of the business to any creditors of the business.

The point of the Bulk Sales Act is to protect creditors and also to prevent liability on the part of the buyer for unknown debts. You should find an attorney to give you advice on this issue.

I'll add one more thing.. I think its already been said.. But honestly, I don't think
it can be stressed enough..

Get a LAWYER... Get a GOOD lawyer... If California is anything like New Mexico, you can go
to the SOS and take a look at corporate summaries.. Pick some companies in your area that
you feel are well run, and look 'em up, and see who represents them...

OR.. Ask the current owner who his lawyer recommends. Its not an adversarial thing.. There
is no malice in getting a lawyer to handle the transaction.. Even better if the 2 lawyers are
familiar with each other.

Buying big things is a PAIN IN THE ASS.. Business contracts are a PAIN IN THE ASS.. When I bought
my building, I asked the owner if he would mind if I had my lawyer look things over.. "I would
actually prefer that you have your lawyer look it all over"... When ALL that paperwork came in,
I looked at it, e-mailed it all to my lawyer and said "YOU deal with it"..

The 2 lawyers knew each other, they had worked together before.. The cost was minimal to make sure
I was protected, that ALL (and there were a lot) of documents were correct, that all the right shit
was filed etc..... I just had to sit down and sign god awful amounts of shit and write some checks.

ALSO.. On the business side, all those filings are going to have to change.. Corporate documents and
all that BS.. Let your lawyer deal with it.. That stuff makes my eyes glaze over.. To them, its
nothing, its like drilling a hole or using a caliper to us, its what they do all day every day..

Remember the CHEAP per hour lawyer probably isn't going to be the cheapest in the end.. Get a GOOD
lawyer... Also, a lot of the shit that will need to be done, the lawyer doesn't even do.. So
you are paying an intern at $45 an hour or a legal secretary at $85 an hour, its not always the
big dollar lawyer doing all the work... But it will be done RIGHT, and that is worth the minimal cost.


Also... Where did the OP go???

Jetrocket said:

Hi Guy's, This is my first post so be gentle with me

I've perused this site for years but have never officially signed up and become a member. I've learned quite a bit from these forums and would like to begin with a genuine thank you to all of you who contribute. I currently have plans to purchase the business that I've been at work for the last 11 years and am in need of a bit of business advice from those that have "been there done that". Here is a little backround about me...

-I'm 29yrs old and have been in machining since I was 18
-In the last 11 years I've moved from my humble beginnings of painting walls to
-Deburring
-Operator
-Set-up
-Programmer
-Inspector
-Quoting
-Purchasing
And currently run the day to day operations as Operations Manager. I've worked many hours beyond required (unpaid or paid) to get a job done and believe that it is my duty to do so. I've been fortunate enough to work with an amazing employer who has granted me every opportunity to grow within his business and like to express my gratitude through my work.

This has lead to the opportunity I'm presented with today... Owning the business. I have been extremely involved with the running of production but am not inept to point out there is complete other side of the business that I have no experience with such a sales/financial anything or any type of marketing. We are ran very old school and it has worked well in the past with our owner but times change and more specifically our customers "requirements" change.

I feel like We've got a decent core group working for us but is not near what we need to function properly on a day to day basis. Skilled labor is hard to find and some of these wages they are requesting seem a bit extreme? I had a guy in last month that wanted $48 an hour to program and occasionally setup a machine which blew my mind that he'd ask that from a small shop like ours.

We've had a core group of customers as well that have been with us for 20+ years. Requirements from them are changing (mostly quality related) that have really put a strain on QA department and have had to invest recently in a programmable CMM as well as a QA/QC department. I know this is probably just needed but for years we operated perfectly fine with the inspection procedures we had before but now seem to be becoming nit picky about small things.

What should I be prepared for? I feel I have an abundance of common sense but how far will that get me? I could write a million more questions but this post seems to already be dragging out lol.

P.S. Time Frame is currently set at 2 years.

Click to expand...

You skipped the absolutely, without a shadow of a doubt, most extremely critical aspect of this decision making process: the finances.

You're not interested in buying a business, and you're definitely not interested in buying a machine shop: you're looking to buy a revenue stream, and maybe some physical or intellectual assets that go along with it. If you're not basing at least 92.5% of your decision on the (verified by a CPA and reviewed by a business attorney) financials, just stop now.

And here's the sad reality of most machine shops: they're not worth very much. For the vast majority of the shops out there, especially the small, old-school job shop level shops: they don't own any products or processes, they have no IP of value, the equipment is barely worth scrap value (except to them) and if they were to close down tomorrow, the customers would all just move on down the road to the next shop just like them. Which they also might do even if the shop stays open.

Keeping that in mind, try to come up with a handful of good reasons to pay a premium for that 'business' rather than going out and starting your own. Or saving up your money and starting small, rather than going massively into debt.

Read 'Rich Dad, Poor Dad' and 'The E-Myth Revisited' - I know too many people who have paid an awful lot of money to buy their job, most of whom wish they would have just kept working for someone else.

Or bought a hot dog cart.

Owning a machine shop is not the next logical step or ultimate level, of being a machinist - it's a huge undertaking as an investment for business-people, even if they happen to be machinists.

Remember there’s another way of valuing the business.

Your the manager, you know what the job needs, what would it cost you to setup afresh 5 doors down?

Whats the place worth with out you?

What do you really earn a hour after your crazy hours?

At 28 a long weeks one thing, comes a point when you want to live life and trust me to do that you need money not a shop and a shit ton of debt.

Taken me 34.8 years to finally get things to the point the mystical shop i keep getting offered by the owner thats retiring at his next birthday is no longer needed by me. Theres just no point buying tooling i don't need for jobs he has lost! The 100K+ the rent he wants is pointless, im going to have to double my current output to just stay as wealthy and i can do that here and not take that bite out of the savings.

Best advice i can give you, carve your own niche, because its really easy to waste several more years chasing some one else’s fixing there problems and by the time they sell they will have been running it down not up, both equipment and customer wise.

My experience.. (we own a law office)..
The lawyers and accountants are a minor, detail, of the deal.

Make the deal now.
You have a possible good-to-great case.. nothing to lose..
Except a minor 10%+ of the deal cash value, as happens.

Deal in writing.
As a contract.
It can have any nr of clauses for both parts to get out -- in case of. That is fine. And should, ideally.
You are *not* the "big corp" taking over paying out lots of money, and *the seller* is not in a negative position - immediately.
Any deal is ideally a handshake deal.
Followed by paperwork and details.
This will, often, tend to upset one or both parties somewhat.

This is YOUR test.
If YOU can manage the sales/purchase process smoothly, with dignity, without rancor, you are likely to succeed in business.

This is how a great business purchase works.
You keep working, the originals owners keep working perhaps less per month, You go and see every single client with the old owner, then again without the old owner, preferable twice on your own.
The original owner gets a much bigger check at end of month, because now they are not paying for any business stuff - You are.
Also, they get Your payment, per month.
Within 3-5 months, the old owners tend to be happy, fade away.
If and when they get bigger net checks, they usually speak well of You.
THIS is your initial carry/income per month.


You add details, for the typical delays in anything and everything.
This makes it easy, non-rancorous, and honest.

Like, if customers pay You late .. you pay the note on the biz late - but banks, suppliers, workers get paid on time.
But it is specified .. and typically The buyer has liability and some costs.
The %% interest costs are nothing.


The seller; the buyer wants to buy xxx at yyy, and pay nnn over aa time, with reasonable delays in cashflow upto 6 months etc.. and in case of inability gets back 80-90% of payments made, to be paid back within 14 days.

The buyer; wants to buy business zzz, at total value bbb, based on current monthly/yearly income of ggg, at hhh margin, with jjj overhead via a,b,c, loans, credits, notes, deposits, guarantees, drafts, credit lines, credit cards etc.. and the company has no additional liability/loans/credits to any other institutions and the seller warrants any payments of same.
The buyer will pay by a/b/c over x/z time, and may have flex time w,e,r at interest y,u,i.

If either party fails to pay, for whatever reason, the reasonable terms of settlement of arrears shall be 4-6 months given ongoing activity and some payments and sales/income from the business.
The seller warrants xx ongoing sales/yy ongoing margin as a major (nn%) part of the value of the sale.

Should the purchaser fail to fulfill his commitments, xx% of payments made are due in x time to be returned and the rest to be kept by the seller as indemnity.

The purchaser may (or not ?? DECIDE) sell the business to another party.
The purchaser may (DECIDE !!!) use PPE, machinery, existing credit lines to finance ongoing activities and or other ventures. At his sole discretion (DECIDE !!!).

The seller has (NOT ??) substantial equity to underwrite any potential liabilities pre-sale, and will assume all responsibility and costs for same and indemnify the buyer from same.

Define the typical silly problems, their costs, their resolution.
Define the "idea" and style of major problems via the contract.

Like "in case of dispute via value of profit from contract/case xxx, we will ask his neighbour doing the same job. And we may ask any similar provider for same product, if unsatisfactory.)
Don´t try to be lawyerese.
Try to define sensible, common-sense, guidelines.

All my examples are real, common, simple.
It is not unusual for small businesses to have major, major liabilities not on the books.
And the older owners having "gone to florida", so to say.

Numbers are the key, and dead simple.
How many kg of steel / stuff was bought, each month, last 6 months.
What was paid for them.
What IT was sold for --

Everything else is nonsense.
You are NOT in it to make widgets.
You are NOT in it to own a machine shop.

You are only in it to make money.
Any and every explanation contrary - is why the other party cannot/could not make money at it.

It is extremely common for machine shops to fail - and another person to have huge success at it.
Same place. Same shop, location, tools, tam, etc.
Having a machine-shop business can generally be, and often is, very profitable.

BUT, if YOU want to run, own, or manage a machine shop, your focus is not, ever, on machining.
Your focus is on money.
Must be.

Financing, cashflow, payment terms, stock turnover per year, sales terms - all these things will determine if You succeed, mostly.
Clawbacks, credit insurance, etc etc.

All the many really successful machining businesses, big, medium and small, I know of, have excellent financials in terms of cashflow etc.

Lots and lots of machine shops have succeeded without any above .. in the past.
Today, not so much - or at all.

Lots and lots of small, tiny, 1-2 guys ops are *extremely profitable* but very risky, about to die, due to poor financials. Very high sales, high demand, high margins .. but bad financials.

Some tiny ops 1-2 guys have great financials, zero possibility of failure.
Some are extremely profitable.

Any business owner, especially a new young guy like you should buy an online company valuation excel model for 30$.
Fill in the data.
Read the book.
It has *nothing* to do with machining - and everything, in one way, to do with Your profits.
You do not need to do your business that way. At all.

If you are capable of doing it like that, once, THEN You can decide what/how/why You want to make multiple business decisions.

Think of it like this.
Will a Venture Capitalist/bank invest in my business based on what I know/ could present ?
If they wont ... why would I lose my personal investment in this business - since no professional investor will put money in it.

Know Your Numbers.
99% of small businesses and medium and large businesses do not know their numbers.
Quick. 5 seconds to answer:
Whats the avg. profit/person, materials cost/unit, finishing cost, overhead cost, in your industry. Avg turnover total, avg personnel, avg turnover / person. Backoffice costs as % of turnover.
List top 10 companies by turnover with the stats for same.
Who are the top 2. Why ?
What is the difference to the next 2 ? Why ?
Where will You be ?

Charlie munger says; if you want to do something, don't wait til you're 90 years old.



2 years sounds like a good time span for you to burn the midnight oil for them to be satisfied to no longer need to sell.

Kudos for you to be advancing so fast. If you can do it there, you can start your own side gig that creates value.

If it is a business your buying, treat it like one.

You can deal with friendly handshakes and generalities, but back them up specifically in writing.

I'll sell this to you at a "Good Price" when I retire in a year or two. Excellent, thank you. Lets nail down Good Price and put a date on year or two.

I'd also take a business course if one is available in your area if you haven't already. It is good to know how to read a P&L, figure your overhead...know how much business you need to take in at a certain % to break even, make money or loss money. If not get some books or find a way to learn.

Lawyers before signing for your protection.



As mentioned before, consider what it would cost to setup your own business without buying one.
How much are the 20 year old customers worth?

Older folk that bought iron years ago and made tons of money with them think their machines are worth there weight in gold. If they had to be auctioned off what money would they bring in? If you had to buy one from an auction or used machine dealer...what would you pay. Those numbers need to be known and understood by you...in the end the price has to add up. has to be agreeable by both parties.

I could go on and on...

The other things to consider are:
do you enjoy doing what you do most of the time?
are you good at it - I mean really good- as in the person who does most of the hard shit?
does it have the equipment you'd like to have in 3-5 years? is it in good condition( or good enough?)
if you were staring your own deal, how long to get to where the shop is?
customers sometimes hire the "man", not the shop- if you do most of the customer dealings you'll be in good shape, if not you may be in deep shit once the current owner is out of the picture
and make sure its your way or the highway if you have the money in it. No 49% owership or "I'll be boss but not on you everyday/ here everyday"

if its a better deal than hanging your own shingle think about it. Hardest part is keeping sales/ orders coming in. Most machinists are terrible salesmen- it may come down to who you know- make it your business to know everybody important.

david n said:

..... The place is only worth the iron and real estate...............................

Click to expand...

Yet some very successful people and corporations buy a small machine shop for one reason only....the established customer list.
Often the iron, real estate and employees are thrown away a few years into the deal yet the customers are retained.
Bob

OH boy, this hits close to home. I just bought the shop I've been working in for the past 10 years, in California.

But we aren't a job shop, we're a manufacturer, so our customers can't just go down the street.

You've been given lots of good advice, but let me second it as someone who was standing in your shoes a couple of months ago.
First: Get a lawyer. A good one. Even at several hundred/hr, it'll be loads cheaper than any of the wreckage that can come from not doing it right.

Second: get a forensic accountant to go over the books. Really. Have them evaluate the business not in terms of 'worth' but in terms of 'what it'll carry'. You don't care what it's worth, you care how much debt load it can carry, because once you buy it, not only does it need to carry all the running expenses it's been dealing with in the past, but all that *AND* paying back the loan you just took out to buy it. Frequently, that's a killer for small shops. There's enough money to cover the original owner, and expenses, but not once you add on a few hundred thou loan, probably due in 5 years.

Third: pay attention to what they tell you. The odds are good that you'll do better financially if you just head down the road to the next shop.

Fourth: Walk away in your mind. Now. Give up all hope of ever owning the shop. Move beyond it. Then reevaluate the deal. If the numbers don't work, then they don't work. Move on. Don't let buck fever talk you into a bad deal.

Fifth: Either the owner's serious about selling, now, or he isn't, ever. Get it all in writing. Now. Don't let them string you along with vague promises. Hard as this is for a lot of us, this is a place where a handshake isn't enough. It's signed, or it's nothing.

Sixth: the original owner will want way too much, and will likely be hurt at the maximum offer that your accountant says you can make. That's unfortunate, but the accountant's job is to keep you from slitting your own throat. Believe them. That's why you paid them so much money.

In the end, it's all about the numbers, and they seldom work out as well as anyone would like.
So ask yourself why you think this is a good idea.
My case was unusual: a small shop with patented products, many of which I'd designed, and an established market and international distributor relationships. The distributors had all been dealing with me for years, so there was an established cash flow once we got over the hump of the first month. (Oh yeah, that's point 7: 30-40K to get past that first month, until your receivables start coming through. Wouldn't want to forget that....) But even with all that, a good chunk of why I stayed was to make sure all our guys still made rent. I could easily have doubled my takehome by just walking out the door at the end. So why are you thinking about taking that leap without the safety net I had? Unless you've got a really good reason, you should stop and think.

Oh, and point 8, given as I just dealt with all the California paperwork: budget about a month and change to get all the various state/bank/salestax, etc paperwork dealt with. The toxic waste thing wasn't too horrible, salestax isn't too bad... Actually, none of it was really all that horrible. The worst of it was dealing with the web hosting/online sales companies, which you may not have. If you do export, the ACE changeover is a right pain, but even that isn't life changing.
Make sure you look at the liability and workers comp insurance policies. You'll have to get your own. Which is partly based on *your* credit. Your credit score is great, right? If not, all your vendor deals will go up, some of them by lots. Allow for it. (or not)

Best of luck,
Brian

TONS of great advice in this thread (and on this forum) on this topic which gets brought up a lot. The one common theme in every post is get things in writing. Handshakes and empty promises are just that, empty. They serve one purpose, and that's to keep you in your chair happily making the owner money while chasing that carrot, and not branching out on your own to compete against him.

Best of luck.